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The International Symposium of Liner Shipping VI - April 21, 1997

April 21, 1997

Remarks of Commissioner Harold J. Creel, Jr.

The International Symposium of Liner Shipping VI - April 21, 1997

Thank you, Ed, for those kind words and that warm welcome.
I would also like to recognize you, Ed, for the key role you have
played in the international maritime community for the past four
decades, and for your extensive contributions to U.S. ocean
shipping policy.

It indeed is a pleasure for me to address this Sixth
International Symposium on Liner Shipping -- I appreciate Dr. Beth
extending an invitation to me. This gathering historically has
served as an important forum for focusing the industry's attention
on the relevant trends in international ocean shipping, and
discussing the best means of dealing with what the future likely
holds. I am happy to be joined in this panel by John Van de Merwe
and Paul Heylman. I will be interested in hearing what Mr. Van de
Merwe has to say about the ongoing efforts to reform U.S. ocean
shipping regulation, along with Mr. Heylman's views on relevant
labor issues facing those involved in international trade.

Before I discuss my country's current efforts to amend its
regulatory shipping law, allow me just a few moments to describe
the FMC's role in today's world of international commerce. Many
view the FMC as that U.S. agency that interjects itself into
bilateral shipping disputes or makes life difficult for ocean
carriers. But we do have a diverse range of responsibilities.

In addition to our responsibilities to protect U.S. oceanborne
trade from unfair treatment by foreign governments and to ensure
that carrier agreements do not unduly impair competition or
adversely affect service or rates, we also are charged with
monitoring the rates and practices of carriers owned or controlled
by their government. These carriers often are not affected by the
economic or competitive factors facing commercial carriers, and the
Commission must make sure that this situation does not result in
rates that are below a reasonable level or cause detrimental
effects on overall trade conditions. The Commission maintains an
investigative and enforcement program directed at various types of
fraud against consumers, unjust discrimination or preference, and
other malpractice's that hamper fair trade.

The Commission also ensures that cruise vessel operators have
sufficient resources to pay judgments to passengers for personal
injury, death, or nonperformance of a voyage. We license freight
forwarders and bond NVO middlemen to protect customers using their
services, and review tariffs and the essential terms of service
contracts filed in our automated filing system -- ATFI. The
Commission provides an expeditious and inexpensive forum for the
formal and informal resolution of private party disputes, and
offers an ombudsman service to mediate maritime disputes in order
to save parties the cost of litigation. And we do all of this with
a staff of only 140 people and a budget of approximately $14
million -- quite a deal for the U.S. taxpayer.

Now to the topic I've been asked specifically to address --
U.S. maritime reform legislation. Ed Schmeltzer initially told me
that among other things, I would be expected to explain why the
U.S. Shipping Act of 1984 needs fixing. Many have asked, "Why is
there this strong movement to change the Shipping Act?" Rates have
been on a downward spiral for years and overall have not been lower
in decades. Service in all sectors of the industry is exceptional
and improving all the time. Carriers can freely enter into various
types of joint arrangements to increase efficiency or address
changing market conditions. And the FMC generally has been
receiving very high marks at home for its efforts to address unjust
shipping practices and create equitable conditions for U.S.
international trade. So why the need for change? Certainly the
rights and obligations of any regulatory system should be reviewed
periodically to ensure that they are keeping up with evolving
industry trends and practices. But does the current law need major
change?

Well, I never arrive at a satisfactory answer to those
questions. I always stop short because I realize that it is not
the responsibility of the FMC to establish the maritime policy of
the United States. That job, thankfully, belongs to the President
and our Congress. The Commission offers its objective views on the
probable effects of various proposals and the actual effects of
current law. It provides technical advice, and assists in
drafting language to achieve desired results. We have been quite
active in this regard, as I will discuss in a moment, but
essentially we serve the legislative process only in an advisory
capacity. We necessarily must take an unbiased approach in the
maritime reform debate, and limit our efforts to working with all
participants towards achieving legislation that is in the best
interest of U.S. commerce as a whole.

Some of you may have heard me speak in favor of maritime
reform legislation the past several months. Please don't read that
as a contradiction of the neutral approach I just spoke of. The
ongoing debate has improved the general approach to reform
legislation. But I also must consider the FMC's funding situation.
Our House of Representatives passed legislation last year that
would have eliminated the Commission, and it proposed drastic cuts
in our 1997 funding. Despite ultimately obtaining a bare-bones
budget, I am told that we again will face an uphill battle for
funding absent enactment of reform legislation. My concern is that
pending enactment of a new law, it will be difficult for us to
properly perform the numerous functions charged to us by the 1984
Act with further budget reductions. Similarly, I have pleaded with
Congress to provide the oversight agency with the funding necessary
to effectively implement any new legislation. It just does not make
sense for the budget process to dictate maritime policy.

The specific reform legislation currently before us is Senate
Bill S. 414. Reform proposals seem to change almost daily, but S.
414 is the blueprint, I believe, at this point. It is a far cry
from the radical approach proposed by the U.S. House of
Representatives last year. The House would have removed all
vestiges of common carriage, entrenched a system of totally hidden
rates and conditions of carriage, and abolished the FMC. S. 414,
while not perfect by any means, certainly is an improvement. It
moves much closer towards achieving a balance between more
streamlined regulation and continued oversight and protection.

S. 414 was introduced on March 10, 1997, with the support of
both political parties, and a hearing was held on March 20. I
testified at the hearing along with representatives from various
segments of the maritime industry. The sponsors of the bill have
indicated that they hope to have the bill sent to the full Senate
for consideration in May. Although that is perhaps a bit
optimistic, this bill is nonetheless on a fast track. Since the
Senate majority leader is a co-sponsor, I anticipate that it will
remain on a fast track.

Without a doubt, the most controversial and debated issue in
the bill is confidential service contracts and the transparency of
rate information. S. 414 permits individual carriers to enter into
confidential service contracts, but requires that all other service
contracts be filed with the government and their essential terms
made publicly available. This proposal reflects a compromise
between those who favor confidentiality to guard against access to
sensitive information by their competitors and those who support
transparency in order to prevent discriminatory treatment. It also
addresses congressional concern that rate transparency and
government oversight are necessary antidotes to the grant of
antitrust immunity for concerted activity.

The Commission is concerned with allowing total
confidentiality for individual carrier contracts. If such
contracts are exempted from agency filing as well as publication,
the door is open for agreement carriers to reach understandings
among themselves on service contract policies and rate strategies,
and then execute individual contracts reflecting those discussions.
The individual contracts would be confidential, benefiting from
the bill's grant of secrecy, despite the fact that their terms had
been discussed under the umbrella of an agreement's antitrust
immunity. Said differently, carriers would have it in their power
to subvert the intention of Congress that contracts involving two
or more carriers, which benefit from antitrust immunity, must be
made public. Additionally, some have voiced concerns that large,
foreign, independent carriers may use confidential contracting as
a means to give unreasonably favorable rates to shippers who are
fellow nationals, to the detriment of competing U.S. shippers.
While that issue may be difficult to address, it does reflect
another possible danger in permitting confidential contracts.

To protect shippers against these potential adverse
consequences, I have suggested an alternative approach. It would
involve filing all contracts with the Commission and requiring
certain essential terms to be made public, but keeping rates,
shipper identity, and perhaps other commercially sensitive
information confidential. This would inform shippers which
carriers are entering into favorable deals for particular
commodities, perhaps heading off unreasonable refusals to deal.
But the details of individual arrangements, most importantly the
rate and the name of the shipper, would be protected from
disclosure so as to avert commercial harm to the contracting
shippers.

The Commission also has pointed out that it is essential for
its enforcement capabilities to have ready access to a complete
copy of all service contracts. Having such access will give the
agency the tools necessary to identify any abuses of antitrust
immunity while preventing the legislation from having the
unintended effect of broadening, rather than curtailing, the impact
of concerted activity. We also will be in a much better position
to identify and address potential violations of the prohibited
acts. As a basic proposition, any lessening of transparency to the
public will increase the importance of government oversight, so as
to maintain an effective check on carrier activities. Thus, at a
bare minimum, it is essential that all contracts continue to be
filed in their entirety with the FMC or its successor. This is not
to inject the agency into the legitimate contracting process -- we
don't do that now -- but rather to ensure that filed contracts are
truly individual carrier undertakings, and do not involve unjustly
discriminatory activity. While I am on the subject of service
contracts, I am troubled by two changes the Senate proposes to make
regarding prohibited activity. Service contracts have been removed
from both section 10(b)(7), which prohibits carrier actions that
are "unjustly discriminatory between shippers or ports," and
section 10(b)(9), which makes it unlawful for carriers and
conferences to subject shippers, forwarders, ports and others to
"undue or unreasonable prejudice or disadvantage." These
prohibited acts presently apply to all service contracts under the
1984 Act. While I recognize that service contracts are inherently
discriminatory, these involved prohibited acts proscribe unjust
discrimination and unreasonable prejudice. I have urged Congress to
consider carefully whether it is truly in the best interests of the
United States to permit carriers and conferences to unjustly
discriminate against and unreasonably disadvantage shippers, ports
and forwarders. Others have objected to this provision, and I am
hopeful that further Senate consideration will result in it being
altered.

The issue of rate transparency is not confined to service
contracts. Although the Senate bill eliminates tariff filing with
the FMC, it requires carriers to publish their tariffs in a
privatized, electronic format. The agency's role is to ensure the
accuracy and accessibility of the carriers' automated tariff. The
bill also continues a measure of common carriage responsibility by
requiring compliance with published tariffs and service contracts.

I am encouraged that the Senate sees the wisdom in having
tariff information available to the public and the oversight
agency. The key issue will be ensuring the maintenance of both
accessible and meaningful data. I also applaud the Senate's
decision to require adherence to the rates published in tariffs and
service contracts. Why have rates published for public inspection
and then permit carriers, based on whatever criteria they choose,
to assess rates bearing no relation to those published? Since the
bill affords greater flexibility in commercial relationships, it
should contain an appropriate safeguard against unfair
discrimination or preference.

While the bill continues antitrust immunity for agreements
among ocean carriers, a decision which I support, I do continue to
believe that some changes to the section 6(g) "general standard"
are necessary to enhance the Commission's oversight and better
enable us to respond to shipper complaints. The standard itself
authorizes Commission action against any agreement likely to reduce
competition in such a way that produces an unreasonable reduction
in service or an unreasonable increase in cost. We have no quarrel
with the standard, but the extraordinarily detailed and restrictive
legislative history of the Act seriously impairs the Commission's
discretion to act. That guidance tells us that market share is not
an adequate test, and even 100 percent control of a trade may be
permissible. We are required to demonstrate "concrete competitive
harm" to shippers, prospectively rendering action against any new
agreement essentially infeasible.

The Commission has suggested that the overly restrictive
aspects of the 1984 legislative history be disavowed and violations
of the general standard treated similarly to all other prohibited
acts covered by the statute. This would enable the Commission to
more effectively apply its expertise to this difficult and
controversial area of regulation. We also have recommended
removing the ban against private parties filing complaints alleging
violations of section 6(g). Cases initiated by the Commission or
brought by a private party complaint could be heard at the FMC with
the normal recourse for judicial review. We see these changes as
increasing the speed and efficiency with which potential agreement
violations may be addressed, without adversely affecting any party.

Conspicuous by its absence in both the proposed bill and many
of the discussions it has generated, is the subject of carrier
alliances. These strategic combinations have evolved over the last
three years to the point where most of the world's major global
carriers participate in one. On the plus side, alliances can
reduce costs, improve service, and create efficiencies for both
carriers and shippers. However, they also have the potential to
decrease competition, increase market concentration, and serve as
a barrier to trade entry or mobility. Another benefit often
attached to alliances - that they will forestall mergers and the
anticompetitive consequences normally connected with them - seems
to come into question with the P&O/Nedloyd merger and the recent
announcement of the proposed union of APL and NOL. We have made no
specific recommendations regarding alliances, other than to suggest
that they be clearly defined so that their regulatory treatment is
not clouded.

S. 414 changes the definition of "controlled carrier" by
removing the stipulation that a carrier falls within this
classification only if it operates vessels registered in a country
which controls it. We agree with this modification since it would
prevent controlled carriers from avoiding the significant
requirements of section 9 by using "flag of convenience" vessels
for their U.S. services. I also would note that the bill addresses
the problem of harmful, below-market pricing by making it clear
that carrier "pricing practices" are fully subject to the
strictures of section 19 of the Merchant Marine Act, 1920. While
I would argue that section 19 currently encompasses carrier
"pricing practices," I believe this clarification is useful if it
removes any existing doubt on the matter.

The Commission generally supports the concept of combining
what are presently two separate entities -- the ocean freight
forwarder and the non-vessel-operating common carrier ("NVOCC") --
into a newly defined ocean freight forwarder. These entities have
historically acted as middlemen in the ocean transportation chain,
and their functions often have been performed by the same or
related companies. It makes good sense to treat them similarly for
regulatory purposes.

An issue of particular importance to the Commission, and as
time has gone on, to most involved in the debate, is the structure
of the government oversight agency. S. 414 places this
responsibility in an independent Intermodel Transportation Board
within the Department of Transportation ("DOT"). The Commission
would merge with the U.S. Surface Transportation Board to form this
new agency. The Commission has repeatedly argued the importance of
retaining a decisionally independent agency to administrator the
complex regulatory scheme for ocean transportation which will
continue even if the bill is enacted.

I am concerned that placing the FMC's functions in an agency
under DOT could send the wrong message to our trading partners, who
respect the swiftness with which the FMC can address unfair foreign
shipping practices. The impression could be that Congress is
signaling an intent to place these critical functions in an agency
less independent than the FMC and therefore less free to take
direct and immediate action. If, however, Congress does place
these functions in an agency under DOT, we will certainly endeavor
to prove to our trading partners that we have retained decisional
independence.

I would like to briefly address one other issue before closing
my remarks. As you know, the Commission in February of this year
had determined to impose sanctions against Japanese shipping lines,
effective April 14, in response to restrictive conditions facing
U.S. carriers and U.S. commerce in the Japanese harbor services
industry. I am sure you all saw our notice last week announcing
that the Commission has determined to suspend these sanctions until
September 4, 1997. Our action was made possible by a successful
round of bilateral discussions between the U.S. Government and the
Government of Japan. These discussions resulted in the signing of
a memorandum of consultation which addressed the conditions of
concern to the Commission. The U.S. and Japanese carriers
recommended suspension of the sanctions, and this action was
supported by the U.S. delegation to the talks.

The Commission was pleased with the Government of Japan's
commitment to more readily approve applications by U.S. companies
for terminal and stevedoring licenses. The Government of Japan
also clarified that the prior consultation system would not be used
to allocate work among operators, and the two sides agreed on a
framework for achieving meaningful reform of the system by July 31,
1997. The Commission directed the U.S. and Japanese carriers to
submit reports on July 1 and August 5 on the status and progress of
the consultative process leading to reform and any developments
pertaining to licensing. The Commission will reassess its decision
to suspend sanctions based on information to be collected from the
parties.

Clearly the Commission is pleased that the discussions yielded
such results, and that a process now is in place that hopefully
will lead to the removal of these long-standing barriers to open
trade in the Japan port industry. It is always our hope that
restrictive practices are removed without the need for the actual
imposition of sanctions. The Japanese Ministry of Transport is to
be commended for its good faith discussions and leadership in
addressing these issues. We are very hopeful that this significant
progress will lead to resolution of the existing problems.
Naturally we stand ready to react to any developments stemming from
the implementation of the commitments, and if necessary will begin
assessing the imposed sanctions on September 4. However, I am
optimistic, in light of the progress that has been achieved, that
these unfair barriers to trade finally will be removed.

I will close with the obvious observation that
S.414 will have a significant effect on the ocean shipping
industry, as well as the manner in which the U.S. oversight agency
conducts its monitoring and review functions. Many have argued
long and hard for the changes this legislation proposes, with the
firm belief that U.S. trade and commerce will be the beneficiary.
I could not have agreed with that assessment if attached to the
House proposal passed in 1996. But S. 414, if modified in certain
respects, could result in a compromise that is beneficial for U.S.
ocean shipping. The Commission stands ready to effectively
implement the policies reflected in any new statute, regardless of
our organizational structure.

Thank you for your time - it has been a pleasure to speak with
you this morning.